U.S. Transportation Department tentatively ruled plan would harm competition in the U.S.-Australasia market

American Airlines Group Inc.,
AAL 4.68%
which in June 2015 asked the U.S. government for permission to expand its existing alliance with Australia’s
Qantas Airways Ltd.
QAN 5.07%
, on Monday withdrew its application, 10 days after the U.S. Transportation Department tentatively ruled that the plan would harm competition in the U.S.-Australasia market.

American, which already code-shares and offers frequent-flier reciprocity with Qantas, had hoped to win antitrust immunity to deepen and expand the relationship into a revenue-sharing joint venture.
Delta Air Lines Inc.
has such an arrangement with Virgin Australia Airlines Pty., and
United Continental Holdings Inc.
with
Air New Zealand Ltd.

But the U.S. government said the proposed partnership would account for nearly 60% of U.S.-to-Australia seats and enjoy the largest market share on nearly 200 routes. The DOT also questioned the proposed alliance’s public benefits and gave the pair two weeks to respond to its findings.

American and Qantas asked for more time so they could fully demonstrate the benefits of their case, but the DOT last week turned them down. So they asked the government on Monday to dismiss the proceeding without prejudice.

“We remain very disappointed in the decision,” American said in a statement. “It represents a significant departure from prior DOT decisions, which have long recognized the pro-competitive benefits of combining complementary international networks.”

The existing, more limited cooperation will continue between American and Qantas, said American, based in Fort Worth, Texas.

In a statement, Sydney-based Qantas said regulators in Australia and New Zealand already approved the deal and found it would deliver significant consumer benefits. Qantas said it and American will now separately assess their positions before deciding what they will do next.

The Transportation Department also has thrown a possible wrench into Delta’s application to form an antitrust-immunized joint venture with Aerovias de Mexico SA, known as Aeromexico. The U.S. government said the deal would generate significant consumer benefits but tentatively required the partners divest 16 slot pairs at congested Mexico City International Airport, divest six slot pairs at New York’s John F. Kennedy International Airport and modify the deal so it can only last for five years.

Delta and Aeromexico, in a Nov. 18 filing, said the divestitures and limitations are “unprecedented” and “arbitrary” and could diminish the partnership’s economic viability to the point where the parties would reconsider undertaking it.

Corrections & Amplifications: “We remain very disappointed in the decision,” American said in a statement. An earlier version of this article incorrectly quoted the airline. (Nov. 28, 2016)